Final and Temp Regulations Issued on Section 501(c)(4) Reporting Requirements

(Parker Tax Publishing July 2016)

Final and temporary regulations have been issued relating to the requirement, added by the PATH Act, that tax-exempt organizations must notify the IRS of their intent to operate as a Code Sec. 501(c)(4) organization. Such organizations generally have 60 days from their formation to comply with the notification requirements. T.D. 9775.

Background

Code Sec. 501(c)(4) provides a tax exemption for civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or for certain local associations of employees.

The Protecting Americans from Tax Hikes (PATH) Act (Pub. L. 114-113, 12/18/15) added new Code Sec. 506, under which a Code Sec. 501(c)(4) organization must provide to the IRS notice of its formation and intent to operate as such an organization.

Compliance Tip: An organization may apply to the IRS for recognition that it qualifies for Code Sec. 501(c)(4) tax-exempt status using Form 1024, Application for Recognition of Exemption Under Section 501(a), but there is no requirement to do so. In general, filing Form 1024 will not relieve an organization of the requirement to file the Code Sec. 506 notification. Conversely, a Code Sec. 506 notification is not an application for recognition of tax exempt status.

In general, the Code Sec. 506 notification requirement applies to Code Sec. 501(c)(4) organizations that are established after December 18, 2015 (the date of enactment of PATH). The notification provisions also apply to any other 501(c)(4) organization that, on or before December 18, 2015, had not:

(1) applied for a written determination of recognition as a Code Sec. 501(c)(4) organization; or

(2) filed at least one annual information return or notice required under Code Secs. 6033(a)(1) or 6033(i) (that is, a Form 990, Return of Organization Exempt From Income Tax, or, if eligible, Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, or Form 990-N (e-Postcard)).

As enacted, Code Sec. 506 requires a Code Sec. 501(c)(4) organization, no later than 60 days after the organization is established, to notify the IRS that it is operating as a Code Sec. 501(c)(4) organization; for existing organizations subject to Code Sec. 506, the notification was due no later than June 15, 2016, 180 days after the date of enactment of PATH.

The temporary regulations issued in T.D. 9775 (7/12/16) prescribe the manner in which an organization must notify the IRS that it is operating as a Code Sec. 501(c)(4) organization. The regulations are effective on July 8, 2016.

General Requirements for Code Section 506 Notifications

The temporary regulations generally require a Code Sec. 501(c)(4) organization to submit the Code Sec. 506 notification to the IRS on Form 8976, Notice of Intent to Operate Under Section 501(c)(4), no later than 60 days after the date the organization is organized. This 60-day period may be extended for reasonable cause.

Consistent with Code Sec. 506(b), the temporary regulations specify that the notification must include:

(1) the name, address, and taxpayer identification number of the organization;

(2) the date on which, and the state or other jurisdiction under the laws of which, the organization was organized; and

(3) a statement of the purpose of the organization.

The notification must also be accompanied by payment of a user fee, set at $50 for 2016.

The temporary regulations provide that, within 60 days after receipt of the notification, the IRS will send the organization an acknowledgment of such receipt. The temporary regulations clarify that this acknowledgment is not a determination with respect to tax-exempt status. Instead, an organization that seeks IRS recognition of tax-exempt status under Code Sec. 501(c)(4) must separately request a determination pursuant to the procedures in Rev. Proc. 2016-5, or its successor.

For information on the applicable penalties for failure to submit the notification, the temporary regulations refer to Code Sec. 6652(c)(4), which imposes penalties on the organization and on persons who fail to timely submit the notification in response to a written request by the IRS, as well as Code Sec. 6652(c)(5), which provides a reasonable cause exception, and Code Sec. 6652(c)(6), which provides other special rules that generally apply for purposes of Code Sec. 6652(c) penalties.

Practice Tip: Detailed procedures for submitting the Code Sec. 506 notification can be found in Rev. Proc. 2016-41. The topics covered include the method for electronically submitting Form 8976, the information to be provided on a completed Form 8976, and the effect of submitting Form 8976. The revenue procedure also discusses the penalties for failing to timely submit Form 8976 and provides an example of when reasonable cause relief from the penalty would be appropriate.

Special Rules for Organizations Formed on or Before July 8, 2016

Pursuant to the PATH Act, the requirement to submit the Code Sec. 506 notification does not apply to certain organizations that notified the IRS of their existence on or before December 18, 2015. The IRS notes that some Code Sec. 501(c)(4) organizations may have notified the IRS of their existence between the enactment of PATH and the issuance of Form 8976 by applying for a written determination of tax-exempt status or filing a required annual information return or notice. To reduce the burden on these organizations and the IRS, the temporary regulations provide relief from the requirement to submit the notification for any Code Sec. 501(c)(4) organization that, on or before July 8, 2016, either:

(1) applied for a written determination of recognition as a Code Sec. 501(c)(4) organization (using Form 1024); or

(2) filed at least one annual return or notice required under Code Sec. 6033(a)(1) or (i) (i.e. a Form 990 or, if eligible, Form 990-EZ or Form 990-N).

In order to allow adequate transition time for organizations that do not qualify for this transition relief to submit the notification in the manner prescribed by these regulations, the temporary regulations provide that an organization that was organized on or before July 8, 2016, will have until September 6, 2016, to submit the notification.

For a discussion of Code Sec. 501(c)(4) organizations, see Parker Tax ¶60,504.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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